WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period Ended March 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______ to _______
Commission File No. 0-12896 (1934 Act)
(Exact name of registrant as specified in its charter)
Former name, former address and former fiscal year, if changed since last report.
Check whether the registrant (1) has filed all reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act) Yes ___ No X
State the number of shares outstanding of each of the issuer’s classes of common stock as of March 31, 2004.
(i)
1
2
3
See accompanying notes
4
The accounting and reporting policies of the Registrant conform to generally accepted accounting principles and to the general practices within the banking industry. The interim financial statements have not been audited; however, in the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements have been included. These adjustments include estimated provisions for bonus, profit sharing and pension plans that are settled at year-end. These financial statements should be read in conjunction with the financial statements included in the Registrant’s 2003 Annual Report to Shareholders and Form 10-K.
Basic earnings per common share outstanding are computed by dividing income by the weighted average number of outstanding common shares for each period presented. Diluted earnings per share are computed using the treasury stock method.
Certain amounts in the financial statements have been reclassified to conform with classifications adopted in the current year.
At March 31, 2004 the Company had two stock option plans. The Company has elected to continue to apply the provisions of APB No. 25 and related interpretations in accounting for stock options and to continue to provide the pro forma disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, “Accounting For Stock-Based Compensation – Transition and Disclosure”, in the table below. Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company’s common stock at the date of grant over the amount the employee or director must pay to acquire the stock. Because the Company’s stock option plans provide for the issuance of stock options at a price of no less than the fair market value at the date of the grant, no compensation cost is required to be recognized for the Company’s stock option plans.
5
6
7
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations
Net income for the first quarter of 2004 increased 7.14% to $2.09 million from $1.95 million for the comparable period in 2003. Basic earnings per share were $0.53 in the first quarter of 2004 compared with $0.50 in 2003.
Return on average assets was 1.30% for the first quarter of 2004 and 1.34% for the comparable period in 2003. Return on average equity was 12.79% for the first quarter of 2004 and 13.14% for the first quarter of 2003.
The principal source of earnings for the Company is net interest income. Net interest income is the difference between interest and fees generated by earning assets and interest expense paid to fund them. Net interest income, on a fully tax equivalent basis, increased $176 thousand, or 2.89%, for the first quarter of 2004 over 2003. The net interest yield, defined as the ratio of net interest income on a fully tax equivalent basis to total earning assets, decreased to 4.16% in 2004 from 4.44% in 2003.
Tax equivalent interest income decreased $251 thousand, or 2.88% in the first quarter of 2004 from the same period of 2003. Average earning assets increased $53.73 million, or 9.81% in the first quarter of 2004 compared to the first quarter of 2003. Comparing the first three months of 2004 to 2003, average loans increased $25.04 million or 6.61% while investment securities increased $31.56 million or 21.35%. Certificates of deposit decreased $6.38 million or 3.08% while checking and savings accounts increased $18.75 million or 11.62%.
Interest expense decreased $427 thousand or 16.30% in the first quarter of 2004 from the first quarter of 2003. Interest bearing liabilities increased $30.60 million or 7.08 % in the first quarter of 2004 over the same period in 2003. The cost of funding those liabilities decreased 53 basis points from 2003.
Page 10 shows an analysis of average earning assets, interest bearing liabilities and rates and yields.
9
* Tax equivalent yields based on 34% tax rate. ** Nonaccrual loans are included in the average loan balances and income on such loans is recognized on a cash basis
10
The provision for loan losses is a charge against earnings necessary to maintain the allowance for loan losses at a level consistent with management’s evaluation of the portfolio.
The provision for loan losses was $150 thousand for the first three months of 2004, down from $300 thousand in the comparable period in 2003. Loans charged off (net of recoveries) were $152 thousand compared with loans charged off (net of recoveries) of $194 thousand in the first three months of 2003.
On March 31, 2004 nonperforming assets totaled $599 thousand compared with $1.41 million on March 31, 2003. The March 2004 total consisted of $47 thousand in foreclosed real estate, $165 thousand in a former branch site now listed for sale, and $387 thousand in nonaccrual loans. The March 2003 total consisted of $1.24 million in foreclosed real estate and $165 thousand in a former branch site now listed for sale. Loans still accruing interest but past due 90 days or more increased to $1.52 million as of March 31, 2004 compared with $396 thousand as of March 31, 2003.
The allowance for loan losses on March 31, 2004 was $4.83 million compared with $4.67 million on March 31, 2003. It represented a multiple of 8.06 times nonperforming assets and 12.49 times nonperforming loans. The allowance for loan losses was 1.19% and 1.21% of loans on March 31, 2004 and 2003 respectively.
For the first quarter of 2004 other income increased $347 thousand, or 19.23% over the same period in 2003. The increase in income is attributed to increases in income from fiduciary activities, other service charges, commissions and fees and securities gains.
For the first quarter of 2004 total other expenses increased $462 thousand or 9.90% over the first quarter of 2003. Other operating expenses increased $146 thousand or 14.19%. Salaries and employee benefits increased $287 thousand or 9.82%. Occupancy expenses increased $37 thousand or 11.99%.
At March 31, 2004 total assets were $660.79 million, up 2.30% from $645.91 million at December 31, 2003. Total loans grew $1.55 million or 0.39%. Investment securities and federal funds sold increased by $14.69 million, or 7.34% in 2004.
Total deposits increased $18.71 million, or 3.82% in 2004. Securities sold under agreement to repurchase decreased $6.87 million, or 18.09% in 2004.
11
The Company’s capital position remains strong as evidenced by the regulatory capital measurements. At March 31, 2004 the Tier I capital ratio was 14.07%, the total capital ratio was 15.17% and the leverage ratio was 9.64%. These ratios were all well above the regulatory minimum levels of 4.00%, 8.00%, and 3.00%, respectively.
The Company purchased land in April of 2004 for an additional branch location in Isle of Wight. The branch is anticipated to open in early 2005.
The Company purchased a vacant building in October 2003. The building is being renovated and will be used as office space for bank personnel. The renovations are expected to be completed in the later portion of the 2nd quarter of 2004.
An additional branch location in Williamsburg is expected to open in late 2004 on land purchased by the Company in 2000.
The Company believes that it has adequate internal and external resources available to fund its capital expenditure requirements.
Liquidity is the ability of the Company to meet present and future obligations to depositors and borrowers. The Company experienced deposit growth which met targeted projections and loan growth that was slightly less than targeted projections in the first three months of 2004. The Company continues to monitor and seek investment opportunities in the current rate environment.
Management believes that the key to achieving satisfactory performance is its ability to maintain or improve its net interest margin and to generate additional fee income. The Company’s policy of investing in and funding with interest sensitive assets and liabilities is intended to reduce the risks inherent in a volatile economy.
The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
The Company continually evaluates the accounting policies and estimates it uses to prepare the consolidated financial statements. In general, management’s estimates are based on historical experience, on information from first party professionals and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
12
The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting. (1) Statement of Financial Accounting Standards (SFAS) No. 5 “Accounting for Contingencies”, which requires that losses be accrued when they are probable of occurring and estimable and (2) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”, which requires that losses be accrued based on the differences between that value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.
In evaluating the adequacy of the allowance for loan losses, the Company has divided the loan portfolio into nine pools of loans. Allocation percentages are applied to the loan pools utilizing the following factors:
1. economic trends and conditions 2. trends in volume and terms of loans 3. delinquency and non-accruals 4. lending policies 5. lending management and staff 6. concentrations of credit
The Company also maintains a four-year loss experience history on each category of loan. Using the six factors listed above, management can modify the allocation from the four-year historical average.
Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the conditions of the various markets in which collateral may be sold all affect the required level of the allowance for loan losses and the associated provision for loan losses.
As part of the lending process, the Company receives fees from borrowers or potential borrowers related to loans underwritten. All origination fees received in the origination of a loan that are not pass-through fees, and certain direct origination costs are deferred and amortized over the life of the loan.
The Company records Other Real Estate Owned on the financial statement at fair value. Fair value is typically determined based on appraisals by first parties, less estimated costs to sell. The Company monitors the fair value of Other Real Estate Owned and adjusts the carrying value on the financial statement accordingly.
13
The Company recognizes expense for federal income and state bank franchise taxes payable as well as deferred federal income taxes for estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the consolidated financial statements. Income and franchise tax returns are subject to audit by the IRS and state taxing authorities. Income and franchise tax expense for current and prior periods is subject to adjustment based on the outcome of such audits. The Company believes it has adequately provided for all taxes payable.
14
Old Point Financial Corporation does not have any risk sensitive instruments entered into for trading purposes.
Trading market risk is the risk to net income from changes in the fair values of assets and liabilities that are marked-to-market through the income statement. The Company does not carry a trading portfolio and is currently not exposed to trading risk.
Old Point Financial Corporation does have risk sensitive instruments entered into for other than trading purposes. Based on scheduled maturities, the Company was liability sensitive as of March 31, 2004. There were $121 million more in liabilities than assets subject to repricing within three months. As of December 31, 2003, the Company had $130 million more in liabilities than assets subject to repricing within three months.
When the company is liability sensitive, net interest income should improve if interest rates fall since liabilities will reprice faster than assets. Conversely, if interest rates rise, net interest income should decline. It should be noted, however, that deposits totaling $182.11 million; which consist of interest checking, money market, and savings accounts; are less interest sensitive than other market driven deposits. In a rising rate environment these deposit rates have historically lagged behind the changes in earning asset rates, thus mitigating somewhat the impact from the liability sensitivity position.
Market risk is the risk of loss due to changes in instrument values or earnings variations caused by changes in interest rates, commodity prices and market variables such as equity price risk. Old Point Financial Corporation’s equity price risk is immaterial and the company’s primary exposure is to interest rate risk.
Non-trading market risk is the risk to net income from changes in interest rates on asset and liabilities, other than trading. The risk arises through the potential mismatch resulting from timing differences in repricing of loans and deposits. Old Point Financial Corporation monitors this risk by reviewing the timing differences and using a portfolio rate shock model that projects various changes in interest income under a changing rate environment of up to plus or minus 300 basis points. The rate shock model reveals that a 100 basis point drop in rates would cause approximately a 2.25% decrease in net income. The rate shock model reveals that a 100 basis point rise in rates would cause approximately a 3.83% increase in net income and that a 200 basis point rise in rates would cause approximately a 4.88% increase in net income at March 31, 2004.
15
Item 4. Controls and Procedures
Within the 90 day period prior to filing of this report, an evaluation was carried out under the supervision and with the participation of Old Point Financial Corporation’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule [13a-14(c) /15d-14(c)] under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by Old Point Financial Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, the Company did not make any significant changes in, nor take any corrective actions regarding its internal controls or other factors that could significantly affect these controls.
16
17
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
May 10, 2004
18